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Internationalization is the process in which companies increase their involvement in international operations. Other scholars define it as the process by which organizations become aware of the direct and indirect influence of international business transactions on the organization’s future and the ability of the company to establish and be in a position to conduct transactions with other countries across the world. Internationalization can take various forms with the most common being mergers and acquisitions. Companies internationalize for various reasons. However, the most common is diversity of the products, increase of the market share and the revenue of the organization. Before an organization goes multinational, it must consider certain factors such as its financial capacity and the benefits of the internationalization process.
Advantages of Internationalization
The most common factor that drives most corporations to internationalize their operations is to increase their revenue. According to Tony and Jeffrey (2007), firms that have internationalized their operations can benefits by increasing their operational flexibility. Operational flexibility originates from the ability of the MNC to shift value chain activities such as outsourcing, manufacturing, and distribution activities. The company can shift these operations across other foreign subsidiaries that are located in different countries. Due to these changes, the company can realize the changes in labor and other input costs, movements in exchange rates, other macroeconomic conditions, tax and tariff considerations and actions of competitors (Kogut and Kulatilaka, 1994). A reduction in the operating costs is what can lead to higher revenue and profit. production flexibility provides an important incentive for having geographically dispersed operations. Additionally, the company can preserve its operational flexibility and shift its production to locations offering lower input prices. This will have the effect of insuring against adverse movements of exchange rates. According to Tony and Jeffrey (2007), the value of switching options for the company will depend on the ability of the company and its associated costs that are used to coordinate the company’s subsidiaries located in different countries.
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Disadvantages of Internationalization
Despite the above benefits, internationalization poses some challenges to the company. The company can realize coordination challenges that arise from cultural differences within a portfolio of foreign operations and the misalignment of incentive that arises from ownership that is shared with the local companies in the foreign subsidiaries. The company will have to incur coordination costs that managers incur as they attend to the management of a portfolio of switching options. Tony and Jeffrey (2007) argues that as a firm develops extensive operations throughout the world, the marginal benefits of switching options decline as the firm faces increased marginal costs from greater coordination complexity as well as from a greater information load borne by top managers.
Additionally, the cultural disparities encountered by the firm’s management in foreign subsidiaries can reduce the benefits that the firm attains from its latent options due to reasons such as unfamiliarity of the managers with the rules of the game in the host country and the adjustment of marketing strategies (Barkema, et al. 1996).
Real Option Analysis on Internationalization
The real option proposes that the company can increase it cash flows by utilizing its resources strategically. This means that the company can carry out a survey on the cheap manufacturing countries for its raw materials and products where it can seek to outsource the materials. Specifically, countries such as China have low cost of labor. The company can decide to outsource its products from such countries by establishing subsidiaries in such countries. Through such ventures, the low production costs can change the cash flow statements of the company drastically while increasing its revenue.